Get The Money You Need To Invest Through Soft Money Lenders

Get The Money You Need To Invest Through Soft Money Lenders
By Tony Seruga, Yolanda Seruga And Yolanda Bishop

Investing in commercial real estate, like any investment, is an
assessment of risks and potential rewards. Like any commercial
venture, there are always risks, and there are tools in place to
help you reach those rewards, often for incremental increases in
risk. 

One of the easiest tools to use (and misuse) in commercial real
estate development is debt and credit. We're going to
characterize the money you get from lending as "soft money",
money you pay to have access to, as opposed to hard money, where
you're taking an outside investor on to your property.

Fundamentally, paying interest in money is paying someone else
for the privilege of using their funds to make your projects
work out. Interest rates are driven by the Prime Lending Rate,
which you've no doubt heard news stories about. The prime
lending rate is the rate that banks charge other banks for
loans, and is generally set by the Federal Reserve. All other
interest rates made in a given quarter have their rate set as
the prime late plus a small addition to the rate (or, in some
cases, a large addition.)

To determine what sort of money you're going to want,
understand that the banks are in the business of lending money –
and getting paid back with interest for it. They want to
minimize risks, and they'll run a credit check on you, and on
your business. Most people who have the financial means to make
the down payment on a property have cleared up their credit
problems ahead of time, but be aware that a personal or business
bankruptcy in the last few years can get you denied for a loan
or make you pay for an exorbitant amount.

Soft money has interest charged on it; the interest rate is the
percentage of the initial money borrowed that has to be paid (in
profit) to the lendor each year. Thus, if you borrow 100,000
dollars at 8% interest and pay it off in one year, you'll have
paid $108,000 for the property. Those interest rates are
cumulative over time; there's a rule of thumb used in the
financial market for compound (cumulative) interest rates called
the Rule of 72: Divide 72 by the number of points of interest
your money is making, and that's the number of years it will
take for the cumulative interest to equal the amount of the
initial loan. Using our earlier $100,000 investment, at 8% APY,
72 divided by 8 is nine, which means that paying that loan back
over 9 years means you'll have paid out $200,000 for the
property. Always factor your interest rates into your cost
calculations on return on investment, and monthly cash flow
calculations.

Now, the good news is that some interest, especially when
applied to residential properties, is tax deductible for your
business, but still, you'll need to assess several things with
your property before getting the initial loan.

The first one – what's the largest down payment you can afford,
without hurting your own cash position? Larger down payments
result in saving money in the long run, but can be an important
cash flow hit early in the history of the investment. Larger
down payments will usually (but not always) translate into lower
monthly costs on the property (the primary exceptions are when
you're buying a residential property with high tenancy rates –
these command high initial down payments because of their
favorable capitalization rates and revenue potential, but still
have the attendant costs of running a residential property.)

Second, how quickly do you intend to sell this property? The
longer you intend to hold on to the property, the better a long
term loan will look. This is because banks charge lower interest
rates for longer period loans, due to the rule of 72 mentioned
above. If you want to buy, renovate and turn, you're going to
want to get a shorter term loan, because it's harder to sell a
property with attached debts and second mortgages. In
particular, any property that needs substantial improvement may
need to have its interest rate needs assesses carefully – it's
not difficult at all to take a commercial property and turn it
into a money pit that consumes all your profits.

For sources for your loan, the obvious place to look is a bank,
preferably one with a strong business lending history.
Understand that due to the regulations put on the Savings and
Loan industry in the 1980s, it's very hard for small businesses
to get a substantial sum of money; there are regulations that
keep them from lending to new businesses to prevent a future
bailout. Another source for your loan can be a credit union or
building society; these are tools that allow multiple investors
to pool resources to build businesses – this is one reason why
credit unions require all customers be called members, and why
they require a $5 deposit. 

Not so obvious places for your loan: If you're coming out of
the military, you're entitled to a Veterans Administration loan,
generally at very favorable rates, and bypassing a large number
of credit checks for loans of $150,000 or less. While the intent
of this loan program is to let veterans buy their first homes
after mustering out, these loans are excellent tools for new
investors to buy, renovate and turn properties over for a quick
profit.

Similarly, Small Business Investment Relations (or SBIR) loans
can often be had from local chambers of commerce, if you can
provide a solid business plan for how you're going to make a
profit and pay the loan back. Housing and Urban Development
loans can also be had for investors who intend to hold on to a
property for low income housing, though this tends to be best as
for a "buy and hold" strategy.

About the Author: Tony Seruga, Yolanda Seruga and Yolanda
Bishop of http://www.maverickrei.com specialize in commercial
and investment real estate.  As of May, 2006, they and their
partners are managing over $600 million dollars worth of new
projects.

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